Greener pastures could turn to gold
Opportunities await in emerging markets in 2008. And following on from last week, here's the promised look at markets outside the UK.
Despite a strong performance from the emerging markets sector last year, investors have been very slow to put any weight behind them.
I suspect this has, in part, to do with the perceived risk. Investors, quite rightly, feel that they do not have either experience in these individual markets or an overview that will give them confidence to invest.
Yet there is plenty of research out there that aims to do just this.
If worries were put aside, what is it that is attractive about these markets? Unlike already developed countries, the emerging economies tend to be based on commodities. We have just seen oil top $$100 a barrel and the price of 'soft' commodities, such as wheat, is rising as well.
Did you know that the industrial output of the world's seven major emerging markets is 12% compared to just 2% for the seven major developed markets? A recent comment in The Economist shows the 2008 estimate for UK output is 2.1% as opposed to 5.2% for Poland and 7.9% for India.
So which countries are worthy of your hard-earned cash?
Last year many investors dipped a toe in the water by starting with the BRIC - Brazil, Russia, India and China. But there are many more now jostling for position.
The slumbering giant that is Africa is beginning to emerge along with both the Far and Middle East, not forgetting, of course, eastern Europe.
A quick prognosis for each area might be useful:
› Brazil: Rich in commodities and agricultural land - good medium to long term outlook. Corporate governance has been an issue in the past but this has been tackled. There is a separate segment to the Brazil stock exchange - Novo Mercado - that gives minority shareholders full voting rights. The majority of companies have independent directors.
› Russia: Has not performed as well as many others but thus has more growth potential. Unlike some is not dependent on external investment as 70% of turnover is sold to domestic market. Still has somewhat turbulent relations with the West. But as long as the West needs oil, gas and so on then Russia will perform. The other slight concern is an inability to deliver shareholder value as a priority, as witnessed by Gazprom's behaviour with Belarus.
› India: Strong management teams interested in shareholder value and developing their country. From capitalist point of view, is more developed than most and there is more by way of banking and financial activity to underpin economy.
› China: Looks very expensive, and therefore risky, because of valuations that are showing 40x earnings. Again companies are not always run with shareholders in mind and many use capital to play the stock market and may well get burnt in the process.
› Africa: Wealth of natural resources not yet mined. China has quadrupled investment in Africa. That said, we are taking in the main sub-Saharan countries in this context. As we have seen recently in Kenya, political storms can erupt suddenly. But with reducing debt burden and development of infrastructure projects, shares are relatively cheap.
› Far East: Always difficult to get right and still possible downturns in certain areas. But sticking with funds that are country-specific may prove a reasonable bet.
› Middle East: Will depend largely on whether Saudi Arabia opens markets to foreigners. If so, then there will be some very interesting opportunities in the next decade. One to watch.
› Eastern Europe: GDP growth rate will be double that of the developed West over next 10 years. Some countries little over-valued. On fringes of Europe prospect of above average growth in Turkey. It has 40m people, and if it can contain inflation could become a huge market opportunity.
In summary then emerging markets often represent a very good investment opportunity. However, good fund research is necessary and a sound plan should be put in place.
As usual, if you want some direction in this area, please contact me via www.realwealthmanagers.co.uk.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services, which is regulated by the Financial Services Authority.